Effective February 20, 2009, real estate developers will need to comply with new requirements aimed at preventing money laundering. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act, S.C. 2000, c. 17 (the "Act") and regulations will be amended to impose on real estate developers certain record keeping and reporting requirements. Brokers will also be subject to essentially the same record keeping and reporting requirements.
If you are a real estate developer or broker you will need to comply with the following types of requirements:
1. Record keeping;
3. Client identification; and
4. Compliance regime implementation.
According to the Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC") (the independent agency that administers the Act), approximately 50% of all known money laundering cases in Canada contain a real estate component, making the risk of being inadvertently exposed to money laundering very real for both developers and brokers.
B. DEVELOPER OBLIGATIONS
1. Are you a "Developer"?
The Act defines a developer as an individual or entity, other than a real estate broker or sales representative and whether selling a "Property" on one's own behalf or on behalf of a subsidiary or an affiliate, who in any calendar year after 2007 has sold one of the following to the public:
- at least five new houses or condominium units; or
- at least one new commercial or industrial building; or
- at least one new multi-unit residential building, which contains five or more residential units; or
- at least two new multi-unit residential buildings that together contain five or more residential units.
If you fall within the definition, as a developer, you must comply with the record keeping and reporting obligations when you sell a new house, condominium unit, new commercial or industrial building or a new multi-unit residential building (each, a "Property") to the public. You will not have to comply with these requirements if: (i) you are developing and selling bare land; or (ii) you have retained a real estate broker or licensed real estate agent to sell Property on your behalf.
2. Record Keeping, Reporting, Client Identification and Compliance Regime
(a) When do you need to record funds?
Generally, you must record funds you receive in the following two instances:
- when you sell Property as described above; and
- when you are involved in certain "large cash transactions".
(b) Record Keeping and Client Identification Procedures
When selling Property, you must:
- keep a receipt of funds record for every amount you receive, from any party, in the course of a single transaction, unless you receive the funds from a financial entity or public body;
- ensure the receipt of funds record contains the amount and currency of the funds, the purpose for which funds were received, details of the transaction, account numbers and, if the funds are received in cash, details on how those funds arrived including any circumstances considered "unusual";
- ascertain the identity of every person conducting the transaction, or contributing funds to the purchase at the time the purchase and sale contract is executed;
- keep an information record for each purchaser, whether an individual, corporation or other entity:
- if the purchaser is an individual, obtain the purchaser's name and address, date of birth, and the nature of the principal business or occupation;
- if the purchaser is a corporation, obtain proof of the corporation's existence, the names of the corporation's directors and obtain a copy of documents demonstrating that the corporation has the power and capacity to enter into the transaction; and
- if the purchaser is an entity, other than an indivuidal or a corporation, confirm the entity's existence;
- if the transaction is being conducted on a third party's behalf, confirm the existence of every other entity on whose behalf the transaction is being conducted – the actual purchaser (proposed beneficial owner of the Property) has to be identified;
- keep a copy of the identification provided by the purchaser, or other party, in the client information record (you should request government issued identification that bears a unique identification number), unless you know the purchaser or other party and have identification on file;
- if you are required to obtain identification for an individual and cannot have a face-to-face meeting with the individual, either (i) use an agent to obtain the client identification information on your behalf; or (ii) obtain two forms of alternate identification such as a credit file, attestation of a third party or cleared cheques or deposit records;
- if you use an agent to obtain the client identification information on your behalf, have a written agreement between you and the agent for that specific purpose;
- keep the receipt of funds record and client information record on file for five years; and
- supply the receipt of funds record and client information record to FINTRAC upon request.
(i) Large Cash Transactions
You must submit a large cash transaction report to FINTRAC within 15 days of receiving $10,000 or more in cash in the course of a single Property transaction, or receiving two or more cash amounts, within 24 hours of each other, of less than $10,000 each, but totaling $10,000 or more for the same transaction.
Large cash transaction reports are not required if you receive the cash from a financial entity or from a public body. For the purposes of reporting, cash does not include cheques, money orders or other negotiable instruments.
If you submit a large cash transaction report to FINTRAC, you are not required to keep a receipt of funds record for the same amount.
(ii) Suspicious Transactions
If there are reasonable grounds to suspect a transaction or attempted transaction to purchase a Property is related to money laundering or terrorist financing, then you must report this transaction to FINTRAC. There is no monetary threshold for suspicious transactions. FINTRAC has provided a list of potential indicators which may help you identify a suspicious transaction, but a general rule is if the party is trying to obscure the funds, or the origin of those funds, it is a suspicious transaction.
For a suspicious transaction or attempted suspicious transaction, you must submit a report to FINTRAC including:
- your name;
- details of the transaction or attempted transaction and the person who conducted it;
- whether the transaction has been completed or not; and
- a full explanation of why you believe the transaction or attempted transaction to be suspicious, relating to money laundering or relating to terrorist activities.
Reporting of large cash transaction and suspicious transactions must be done electronically, and requires enrolment with FINTRAC. Information on reporting can be found on FINTRAC's website at: http://www.fintrac-canafe.gc.ca/reporting-declaration/1-eng.asp.
(d) Compliance Regime Implementation
You must ensure compliance with the Act's reporting, record keeping and client identification requirements. Your compliance regime must:
- include an appointed compliance officer;
- ensure you develop written compliance policies and procedures;
- assess and document money laundering and terrorism financing risks inherent in your business operations;
- implement an employee training program on compliance and risk mitigation; and
- provide for a review of compliance policies and procedures every two years to test their effectiveness.
C. REAL ESTATE BROKER OBLIGATIONS
1. Are you a Broker or Sales Representative?
The Act defines real estate brokers or sales representatives as individuals or entities that are registered or licensed in a province to sell or purchase real estate (FINTRAC requirements do not apply to brokers' property management activities).
2. Record Keeping and Reporting
Generally, brokers will have the same obligations as developers concerning:
- keeping receipt of fund and client identification records;
- taking reasonable measures to ascertain if the client is acting on a third party's behalf;
- submitting large cash transaction reports;
- reporting suspicious transactions; and
- implementing a compliance regime.
Brokers will also be required to report to FINTRAC if they suspect that a property in the brokers' "possession or control" is owned or controlled by a terrorist group.
If a broker is employed by a company, then the company is required to implement the compliance regime.
D.ARE YOU READY?
February 20, 2009 is fast approaching – are you ready? Failure to comply with the Act's requirements may lead to criminal charges or administrative monetary penalites of up to $500,000. We would be pleased to discuss any questions that you may have concerning the impending FINTRAC requirements and to assist you with reviewing your records and current documentation for compliance with FINTRAC requirements, developing or reviewing existing compliance policies and procedures or employee training programs to assist you with meeting your obligations under FINTRAC.